Need Quick Financing: Consider Factoring

Need Quick Financing: Consider Factoring

Accutrac Capital 24-Mar-2011 0 Comments

If you are a business in need of quick financing, then you have another option besides bank financing, which can be a long, drawn out process. Factoring is another form of financing that is beneficial for firms needing working capital to fund expansion or for continued business. With factoring, a business essentially sells its invoices or accounts receivables to a third party factoring firm at a discount in exchange for immediate funding.

 

Factoring vs. Bank Loan

It's important to note that factoring is different than the typical bank loan financing. First, credit worthiness isn't emphasized -- the value of the factored receivables is. Second, the purchase is that of a receivable, which is a financial asset. Third, receivables financing involves three parties, rather than two, which is typical in a bank loan financing. With factoring, the three parties are the debtor, the business selling the receivable and the factoring agent.

Reasons for Factoring

Receivables financing has been commonly used in large firms for the management of cash flows, but it is been used in an increasing fashion by small business owners for their financing needs. Factoring helps a business obtain money when their available cash is earmarked to meet current obligations or is insufficient to meet these current demands. In other cases, factoring receivables is used to allow for a business that is a high growth mode to continue to expand. Factoring is the answer to allow these firms a have a way to put investment back into their firm's growth.

In essence, the company that decides to factor their receivables sells their outstanding invoices at a discount from their face value. They believe it will be better for them to utilize these proceeds to foster more growth in the business, and want to do so quickly. Businesses engage in receivables factoring when the rate of return on the receivables or invoice proceeds that are invested back in the company exceed any costs associated with factoring.

Another reason why business use receivables financing is due to fluctuations in cash flow. For example, a business may have a large, positive cash flow in one period, but then have smaller cash flow in another period. Because the firm must maintain cash on hand in both periods, they find using factoring as a way to cover cash needs in the short term for those periods when their cash flow doesn't meet the immediate demands. During periods of anticipated low cash flow, each business must decide how much factoring financing it needs to cover shortfalls in cash. Typically, the degree of variability inherent in a business' cash flow is one of the most important deciding components of the size of the cash flow and amount of receivables financing desired.

To learn more please Contact Accutrac Capital, your Canadian source for  Factoring .

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